EC looking for GE concessions to approve Alstom acquisition

UPDATE!

The New York Times also reports on the potential anti-trust issues and GE’s readiness to make some accommodations for EC concerns. However my take away from the NYT article is that GE is warning the EC that Alstom and the European Union have more to lose than GE has if the deal does not go through:

In now dealing with the European Commission’s antitrust office, Mr. Immelt has not forgotten the harsh experience of his predecessor, Jack Welch. In 2001, Mr. Welch failed to win approval for a proposed $42 billion takeover of Honeywell International after objections were raised by Mario Monti, the European antitrust commissioner at the time.

Mr. Immelt was worried enough last week that he met with Ms. Vestager in Brussels, where he also gave an address at the American Chamber of Commerce highlighting Europe’s economic potential. In that address, Mr. Immelt said young Europeans were “awesome” and “amazing,” but he emphasized that Europe needed investment to gain competitiveness and beat unemployment.

Speaking to reporters later, Mr. Immelt said his meeting with Ms. Vestager was “very constructive” and he described her as “a good leader.” G.E., he said, was engaged in “a process” with Brussels, and would “take the process where it goes.”

If G.E. is unable to convince Ms. Vestager of the merits of its case, the next step could be a so-called statement of objections, as soon as next month — formal charges that would outline the commission’s specific antitrust concerns. G.E. and Alstom could avoid that step by offering remedies sooner, perhaps proposing to sell parts of the gas turbine business in Europe.

My expectation was that the European Commision would look for some concessions from GE and would only grant a conditional approval for the acquisition of Alstom’s power and grid businesses.

The EC concerns seemed to be focused on Heavy Duty Gas Turbines (HDGT), and I wrote:

…. In any event, I expect that the deal will go through, but I will not be surprised to see an approval conditional on some assurances from GE regarding R & D centres, R & D jobs and/or R & D budgets in Europe. I think it highly unlikely – and a little meaningless – if the EC were to ask for divestment of Alstom’s HDGT business to a third party (if any such exists). The bottom line is, I think, that Alstom’s HDGT technology has come to a dead-end and can not be developed any further in their own hands. While the business can continue in a diminishing way for some years, Alstom technology has no long-term value except to another party which has access to high temperature cooling technology. To have Alstom continue with the HDGT business as an unwilling and reluctant player does no one any service at all.

This Reuters report today suggests that my expectation may be close to the mark. However it also seems that if the EC demands too much in the way of concessions, GE might walk away. Clearly GE are already getting a little irritated at the protracted nature of the EC approval process. The failure of the deal is not something that Alstom or the EU would look forward to.

General Electric Co said on Monday for the first time it would be willing to consider concessions in order to win European approval to acquire the power equipment unit of France’s Alstom. “We are willing to explore remedies to get this deal done even though again we believe in the merits of the deal,” Steve Bolze, president and CEO of GE Power & Water, the conglomerate’s biggest industrial unit, told Reuters in an interview. Any concessions would have to “preserve the deal economics and our strategic value,” he said. …

…GE already altered the deal to win the French government’s backing during last year’s two-month battle, in which it fended off Siemens and Mitsubishi. In the interview, Bolze acknowledged the “protracted process” for Alstom, and said GE was focused on “how to move … forward as it makes sense.”

In GE’s first-quarter conference call last month, Chief Executive Jeff Immelt backed the deal’s fit for GE, but said if it “ever would become unattractive, we wouldn’t do it.”

…. GE, which is undergoing an overhaul involving the exit of most of its finance assets, has said it expected synergies from the Alstom deal to add between 6 to 9 cents in earnings per share in 2016. But some analysts have told Reuters they doubt GE’s stock would take a big hit should the deal collapse, with the idea that GE could make up those earnings with stock buybacks or other deals. …….

…… EC spokesman Ricardo Cardoso said regulators are waiting for data from the companies before a setting a new deadline to act. The previous deadline was Aug. 6.

The EC will need to be very precise in demanding concessions from GE while ensuring that the deal does go through. Divesting parts of the HDGT business to unknown (and probably non-existent) buyers is probably a lose-lose solution. I expect that GE’s walk-away point will be reached if earnings from the service of Alstom’s fleet of gas turbines is removed from the mix. In fact any conditions set by the EC which dilute future revenues could prove fatal for the deal going through. Assurances about keeping R & D located in Europe and assurances about jobs and even about R & D budgets could be absorbed by a robust business plan. But no business plan can survive if something as fundamental as the revenue stream is adversely affected. And it is the volume of that revenue stream – and not just the margin from those revenues – which is crucial.